IT in for slower growth over next few quarters

Monday, October 27, 2008

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The global recession is taking its toll on the Indian IT sector and has affected the growth rate badly. The trend is evident in results declared by the five largest Indian IT firms for the quarter ended September.

Bangalore: Indian information technology (IT) service firms will witness slower growth over the next few quarters according to experts and analysts because of continuing recession in the US, the largest market for their services.

The trend is evident in results declared by the five largest Indian IT firms for the quarter ended September. Together, the five firms—Infosys Technologies Ltd, Wipro Ltd, HCL Technologies Ltd, Satyam Computer Services Ltd and Tata Consultancy Services Ltd (TCS)—increased revenue by 34.5% over the same quarter last year and 9.2% over the quarter ended June.

With the slowdown spreading to Europe—the other main market for Indian IT services firms—revenue and earnings are likely to be muted for the next two quarters at least, according to one analyst.

According to the results of the five firms, the US accounted for 60% of their business in the quarter ended September and Europe, 27%.

The July-September results of most firms except TCS were broadly in line with the street expectations, mainly aided by a weaker Indian currency during the quarter. But the slash in forecast in dollar earnings—the currency Indian firms bill most customers—by sector bellwether Infosys and smaller rival Satyam, and a flat third quarter guidance by Wipro reflect the uncertainty in business environment. TCS, India’s largest software services firm, actually delivered results below market expectations because of forex losses of Rs 261 crores.

“The downturn will continue to affect service providers until the bottom of the cycle is actually reached,” said Siddharth Pai, managing director of the India unit of technology sourcing advisory firm TPI Inc. “I expect that there will be weakness at least for another two-three quarters”. The uncertainty for Indian IT firms has increased due to the bankruptcy of financial institutions in the US and Europe.

“No one knows what is happening. Customers can come out for renegotiations (on existing contracts), (and) the shortlisted firms (for new contracts) may be asked to submit new bids,” said Nimesh Mistry, equity analyst with Man Financials Ltd, a Mumbai brokerage.

Banking, financial services and insurance companies account for between 26% and 44% of the revenue of the five biggest Indian IT firms.

On 13 October, technology researcher Gartner Inc. said IT spending in 2009 would grow by just 2.3%, more than halving its earlier projection of 5.8%. India’s software lobby, National Association of Software and Services Companies, or Nasscom, has said that it may revise downwards, in December, its July growth estimates of 21-24% growth for the current fiscal.

In its latest quarterly audit of September for global outsourcing contracts, TPI has said only 128 deals were signed for a total consideration of €11.5 billion (Rs73,255 crore) —the weakest quarter for total contract value of outsourcing deals in the past six years.

“The issue is that we have thought the bottom of the cycle was near quite often in the past few months, only to realize it is not really in sight just yet! We really are in uncharted waters,” said Pai in an email.

In April, vendors such as Infosys and Satyam had forecast growth in the current fiscal would be backended or would come in the third and fourth quarters, but both firms cut their dollar guidance this month for the year by as much as 5% due to mix of currency fluctuations and slowing demand environment.

“It is worrying... The slow growth could be there in third quarter or the next fiscal. We can’t say till we have a clear picture on the IT budgets,” said Anurag Purohit, equity analyst with Religare Securities Ltd, a Mumbai brokerage. All the turbulence in the US has meant that major clients for IT services are yet to draw up budgets for the year ahead. Some clarity is expected by the end of December or the beginning of January as the budgetary cycle for the year ahead begins, say analysts and experts.

At the least, that could mean a repeat of last quarter’s performance in the current one too.